This morning I am at the IP Dealmakers Forum in New York City. The opening panel, moderated by Jaime Siegel, CEO of Cerebral Assets, opened the panel, titled Boom or Bust: The Public IP Market by essentially asking the panelists why their stock prices are all down, some substantially, in a year to year comparison. Have investors simply lost their interest in public IP licensing companies?
“Some investors want transparency, and it is difficult to give transparency,” Doug Croxall, CEO of Marathon Patent Group (NASDAQ: MARA) explained. It is about communicating according to Croxall, and the patent market, whether licensing or litigation is a complicated marketplace with great nuance, and in tremendous flux at the moment. Investors are savvy when it comes to money, but are not intimately knowledgeable about the nuances of patent licensing and litigation. “To explain something as complex as patent litigation or licensing in the short window of time… is difficult to do.”
“It is about communicating the value of the company,” explained Phil Hartstein, President and CEO of Finjan (NASDAQ: FNJN), a public company for only three years but a technology company for twenty years.
Jim Skippen, CEO of Wi-Lan (WIN. TO), explained that the down turn in Wi-Lan stock price has largely occurred over the last several weeks and is the direct result of Wi-Lan’s decision to significantly cut the dividend it pays. “We didn’t think we were getting a lot of credit for [the dividend],” Skippen explained, further explaining that in this market having capital to work with is critical. “Not surprisingly we were significantly punished by investors.” Skippen would later return to the theme that cash is so precious, and that in the past the portfolios Wi-Lan acquired were acquired with cash up front, but now most portfolios are acquired with little or no cash upfront.
Corey Horowitz, Chairman and CEO of Network-1 (NYSE: NTIP), who has done better than the other companies over the last year, spent time discussing efficient infringement, which is a real problem in the industry. Horowitz pointed to the reality that getting paid on a successful litigation award is exceptionally difficult today, citing among other things case law from the Federal Circuit. Horowitz also took issue with whether public IP companies are properly valued using the same criteria traditionally used for other types of companies. “Whether our quarterly earnings are better than our last quarterly earnings, I don’t think that is how these companies are valued.”
Skippen, jumped in, pointing out that the crazy valuations are gone and companies are going to be valued on how they perform, taking issue with the notion that quarterly earnings and continued revenue growth are not important considerations for valuing public IP companies.
Perhaps taking a position somewhere in between Horowitz and Skippen, Hartstein acknowledged that there is still great pressure at times to get deals done on a fiscal or quarterly calendar schedule. It is a challenge for public IP companies, as it is for any company, to normalize business so that revenues are continually coming in, Hartstein said.
Pivoting, Siegel asked whether investors are becoming more sophisticated, or are they just buying into the media hype of “patent trolls”?
“I don’t think investors care about names,” Croxall said. “I think they care about results. I have the troll conversation, but it is never with investors. Are they getting smarter about the risk of going to trial? I think they have… I think you get punished more for losing than rewarded for winning.” Croxall also acknowledged that the troll issue seems to have penetrated into the jury box. Hartstein would later agree that public IP companies get punished at least twice as much with a litigation loss as compared with a litigation victory.
“I have to convince people my revenues and earnings are going to grow, they are not that interested in any one trial,” Skippen explained. “The valuable companies in this space are the ones that every quarter deliver solid revenues and solid earnings.”
Other interesting tidbits:
- Hartstein explained that Finjan’s revenue is 4 to 1 license to litigate, and revenue is 2 to 1 license to litigate.
- Hartstein explained that Finjan has more success licensing its portfolio throughout Europe, and the cost and timeline to license is more predictable. Croxall would later agree that the cost and timeline are more predictable in Europe.
- “The power in Europe is the injunctive right,” Croxall explained, agreeing with Hartstein. “And that is an element of due diligence that is a part of a licensing campaign that you have to consider to decide whether it will bring someone to the table to license.”
- Deals are still being done. According to Croxall, Marathon Patent Group has purchased 19 portfolios over the last two years, with about 40% of those portfolios already in litigation when acquired. “If it is just the asset value that you are buying you will have a hard time coming to terms with the owner,” Croxall explained. “You need to know that you are buying something that has more value in the future than you are buying at present.”
- Skippen, explained that Wi-Lan has been traditionally U.S. focused with respect to litigation, but has been looking outside the U.S. and will increasingly look to outside the U.S.
- “For 2016 we have a broader reach outside the United States, but we are still bullish on the U.S. in 2016,” Croxall explained.
- “We are buying back our stock because we think it is attractive,” Horowitz said. “I have at least one trial, maybe two trials… I’m very optimistic about the next two to three years.”
- If your revenue is not growing then you probably shouldn’t be a public company, although you may be a very good and profitable company, Skippen explained.
- “For our 2016, I’m bullish,” Hartstein said.